Biotech Values

[DewDiligence]

MDT Is Aging Gracefully—Maybe

[The premise of this write-up could not be simpler: MDT has a lot of operating leverage; whether this ensures a bright future is unclear, however. In the med-device arena, I much prefer SYK; with an enterprise value of <$20B, SYK offers investors something that MDT does not: buyout vig.]

http://online.wsj.com/article/SB20001424052748704896104575139853085910426.html

›MARCH 24, 2010
By JOHN JANNARONE

High-growth companies are like child actors. After glowing success, the road to adulthood is bound to be difficult.

The challenge is knowing who will wind up a Drew Barrymore or a Lindsay Lohan. Once-highflying medical-device maker Medtronic has navigated its rough patch, repeatedly missing growth targets last decade as revenue swelled above $10 billion. The stock peaked in 2000, on 50 times earnings. It has since fallen 25%, and trades on 13 times 2010 consensus earnings.

It now is clear revenue alone won't ensure Medtronic's success. The company is targeting 5% to 8% annual sales growth. So reaching double-digit earnings growth depends on margin expansion.

That is where age becomes an advantage. Medtronic's infrastructure for product support and procurement has reached a scale that can accommodate more capacity with only modest additional spending. Such costs account for just less than half of sales, general and administrative expenses and only need to rise at about 50% the pace of revenue. With marketing costs also controlled tightly, SG&A could fall to 30% of sales in the next few years from the current 35%.

What's more, Medtronic likely is better positioned to weather the health-care overhaul than rivals Boston Scientific and St. Jude Medical. For one, the government's tax on medical-device makers will be based on revenue, not profits. With the highest margins in the industry, Medtronic's earnings would suffer less. And as Credit Suisse's Kristin Stewart points out, Medtronic sells more spine and diabetes devices, two products most likely to see sales increase when health-care coverage expands. While Medtronic's heyday has passed, it is no fallen star.‹